Most 501(c)(3) organizations believe in a simple approach to lobbying: just say no. Lobbying and other forms of political activity are generally believed to be prohibited for 501(c)(3) organizations. However, the IRS has never banned lobbying activity. There are two different ways to measure lobbying activity and still retain your tax-exempt status. With changes in the tax code likely under a new presidential administration, it is important to know what you can and cannot do to make your voice heard, while still retaining tax-exempt status.
What Is Lobbying?
The IRS simply defines “lobbying” as any attempt to influence legislation. It then provides two broad examples of lobbying: attempting to influence the opinions of the general public and communicating with government employees or legislators for the purpose of influencing legislation. Lobbying also includes encouraging members of your own organizations to attempt to influence legislation on their own, even if the member never mentions your organization by name.
The Traditional Test for Lobbying Activities
Section 501(c)(3) states that “no substantial part” of an organization’s activities may consist of attempts to “influence legislation.” Many organizations take this as a warning not to engage in any lobbying activity, or any political activity at all. What activities “influence legislation”? What activities cross the threshold from insubstantial to substantial? Rather than test the IRS’s limits and patience, it was simply easier to avoid all political activity. The IRS never defined “substantial” and a 5% rule of thumb is not a guarantee that the IRS will approve the activity.
Section 501(h) Election
Instead of relying on the vague language of section 501(c)(3), organizations may elect to have their lobbying activities measured under an alternative, bright-line test.
Almost all 501(c)(3) organizations qualify for the 501(h) election. Only private foundations, churches and church auxiliaries that are exempt under section 501(c)(3) are prohibited from using the alternative test for lobbying activities. All other 501(c)(3) organizations are eligible.
Two Types of Lobbying Activities
Section 501(h) divides political activities into two categories: lobbying expenditures and grass roots expenditures. Grass roots expenditures include all money spent attempting to sway the opinions of the public on a political or legislative issue. Lobbying expenditures includes all money spent on grass roots lobbying, but also includes money spent communicating with members of the legislature or other government employees involved in formulating legislation. There are some exceptions, including communications with government employees for purposes other than influencing legislation and publishing non-partisan research and analysis.
Determining the Taxable Amount
If an eligible organization decides to make a 501(h) election for a certain tax year, its tax exemption will not be jeopardized by lobbying activities unless it spends more than a certain amount on those activities. For organizations that spend less than $500,000.00 on their exempt charitable purposes each year, the lobbying ceiling is calculated as follows: take 20% of your exempt purpose expenditures amount. For larger organizations, there are different threshold calculations. The grass roots expenditures ceiling is typically 25% of the lobbying expenditures ceiling. You need to keep track of expenditures if you make the election. In addition, certain very large organizations may not be eligible.
How to Make the Election
To ensure that this alternative lobbying test applies to your organization, you must file an election on Form 5768 for each tax year in which you want the test to apply. If you do not file the election form, then the traditional test still applies and you risk being evaluated under the “substantial” test.
If you want to learn more about the election and how it may benefit your organization, please contact us for more information.